The Great `Debtor Nation' Myth
OF all the jeremiads on the United States economy, ``the world's largest debtor nation'' is the scariest. The intended image is one of foreigners buying and controlling the US. Americans purchase more foreign goods than foreigners buy in US products, and the size of the trade deficit gives concern to some - though not all - economists. This element aside, though, nothing about the ``largest debtor nation'' idea is valid: not its conception of debt; not the means of calculating US assets abroad and foreign holdings here; and certainly not the argument that our ``indebtedness'' is in fact a problem.
The Commerce Department reports that in 1988, foreign holdings in the US rose sharply to nearly $1.8 trillion, while US assets abroad climbed modestly to just over $1.25 trillion. Hence the claim that we now have more than $500 billion in net foreign debt. One doesn't have to probe very deeply to learn that those basic numbers are highly flawed. US receipts from its foreign assets have exceeded its payments to foreign investors on their assets here every year in the last half century - including 1988, when our receipts were $108.2 billion and our payments $105.6 billion. Unfortunately, this is not evidence of American canniness in matters economic, only a signal that assets are being incorrectly valued.
As Commerce points out, foreign investment in the US and US investments abroad are computed at book value, generally their purchase price, rather than current market value. Since US holdings abroad tend to be older, their book value understates their actual worth by much more than the value of newer foreign holdings in this country is understated. Commerce explains that ``historical cost'' is the accepted basis for accounting records in the US and many other countries; estimates of market value are ``difficult to obtain.'' Nonetheless, market value is the only valid figure - if the object is to compare the worth of our foreign investments and foreigners' holdings here.
To cite another flaw in the basic numbers, US holdings in gold are valued at $42.22 an ounce - the official US Treasury price - though their current real worth is about $370 an ounce. The gap between book value and the market price alone understates US assets by roughly $85 billion. Considering all the peculiarities in the way international investment position is calculated, the numbers on it simply can't be trusted.
Still worse, the investment numbers are used in an argument predicated on a wholly untenable concept of debt. According to this definition, when a Japanese company buys a hotel in Hawaii, or the British purchase an American advertising agency, our national debt climbs. By Commerce's calculation, the US was a net debtor throughout the 19th century and up until 1914. The huge British investment in American railroads, for example, is referred to as debt, a term the public understands to connote an adverse condition.
But, of course, it wasn't adverse at all. The British investment in railroads contributed importantly to American economic development. Europeans in general saw the US as a good place to invest in the late 19th and early 20th centuries, and we needed their capital. In 1900, the book value of foreign investments in the US totaled about $3.5 billion, an amount that exceeded our holdings abroad by nearly $3 billion - a far more lopsided relationship than anything we can now envision. This inflow of foreign capital added to our economic growth.
Economist Herbert Stein points out that the present inflow of foreign capital into the US isn't a problem either. It benefits both the US and the foreign investors. They have higher earnings, more investment security, etc., than they would have if they lacked access to the US. We get capital needed to finance additions to the country's stock of productive assets. It's plain wrong, Stein argues, to say that the inflow of foreign capital is financing the federal budget deficit or the high level of private consumption.
``The larger the inflow of foreign capital is,'' he writes, ``the larger productive investment will be, unless the capital inflow depresses domestic savings or increases the budget deficit, which it is unlikely to do to any significant degree. Similarly, the form of our imports is irrelevant. Importing consumer goods leaves more of our domestic resources to produce capital goods.''
At some point, to be sure, the sheer size of foreign holdings and the payment they extract may be troubling. The US just isn't in such a position, however. As noted, our current annual payments to foreign investors are roughly equal to our receipts from investments abroad, but beyond this both remain small in relation to the size of the US economy - between 2 percent and 2.5 percent of GNP in 1988.
The point is not to counsel complacency; our $5 trillion economy has plenty of problems. But our international investment position isn't one of them. That the myth of the US being the ``largest debtor nation'' shows such staying power, when it is so amply contradicted by the facts, is a sorry commentary on the nation's ability to assess its economic status.